October 6, 2012

Medicare Is Too Good a Deal



I have had two experiences this week that suggest that the government is providing too much subsidy for Medicare. In one case, I received my 2013 plan materials from my Medicare Advantage plan. In the other, I had a medical episode that required extensive testing with high-technology equipment, and consultation with professional medical staff, for which I paid $20.

Under my Medicare Advantage plan, the amounts I pay for various services will actually be reduced. The maximum “out-of-pocket” amount that I will pay for all hospital and doctor services during the year is $3900 – a reduction of $1000 from this year’s $4900. For visits to my primary care physician, I now have a copayment of $5.00. Next year they will be free – no copayment. The cost of visits to specialists will be reduced from $35 to $20, and numerous other medical services will have a similar reduction.

In the other episode, I had to visit a hospital for a barium swallow test after a pill I swallowed went into my lungs rather than my esophagus. The test required a speech therapist to feed me various foods and watch the course of the foods through my throat on a very expensive looking x-ray machine. She will later write a report that will be sent to my specialist doctor. The process took 40 minutes, used expensive equipment, and included a detailed conversation with the speech therapist about what I could do to avoid further episodes. The hospital charge for the test was $180, there was an insurance discount (required by Medicare) of $80, the hospital billed Medicare for $80, and I paid $20.

These prices are ridiculous because I can easily afford to pay more.  It may be reasonable to provide highly discounted prices to low-income persons who really don’t have money to pay for medical care (many of whom would be on Medicaid), but any reasonably affluent person could afford to pay more than I paid above for important medical services. The problem is not just that I am getting away with a cheap price; it is that other people are subsidizing that price through their taxes. With a one trillion dollar annual deficit, in order to save me $1000 in my annual medical costs, the government will be forced to borrow money from China.

Subsidization by the government of such routine medical expenditures as doctor visits or lab tests subverts the purpose of insurance, which should be to protect against the costs of major medical events. Earlier in the year, I had a knee replacement operation, in which I spent three nights in the hospital. The hospital billed the government $108,000; Medicare disallowed $96,000, but paid $12,000 for the services provided to me. The initial bill obviously overstates the hospital’s costs, but the net amount seemed reasonable, if not a little bit less than what I had expected. The savings to me were substantial and an appropriate subject for insurance.

The price reductions imposed by Medicare also have unfortunate economic consequences. The marginal cost of a visit to my primary care physician is now zero. Now, anyone with a sniffle can go to the doctor for free, while previously, the minimal expenditure of five dollars would have dissuaded many people from bothering to go. I suspect there will be a substantial increase of patients in  doctors’ waiting rooms. This, of course, imposes a noneconomic cost in terms of waiting time that is probably the equivalent of the five dollar fee. But the fee is much more efficient as a market clearing mechanism.

There has been political discussion about means testing Medicare, with even President Obama supporting the concept. However, these discussions seem to have focused on increasing premiums for wealthier Americans. I suspect there would be more impact on Medicare expenditures if we means tested payments by the individual for medical services. A more affluent person might not be dissuaded from a doctor visit by a $20 co-pay, but might decide that $100 co-pay makes the visit not worth the expense. Whichever way it goes, there ultimately should be some form of means-testing.

October 3, 2012

A Clear Explanation of the Budget Deficit Problem


I received from a friend in California a link to a YouTube video posted by a retired IBM accountant. Since he actually focuses on the columns in the federal budget, it is very simple, but clear, with the conclusion that Congress can never close the budget deficit. It is worth watching.

July 24, 2012

Obama's Logical Fallacy on Entrepreneurship


          President Obama's statement last week attacking entrepreneurship has received more notoriety than anything else by any candidate so far in the selection. In case you have been on vacation in Antarctica, he made two ridiculous statements that he has been trying to explain away ever since. These were "look, if you've been successful, you didn't get there on your own" and "if you got a business – you didn't build that. Somebody else made that happen." Numerous commenters have noted that these demonstrate President Obama's lack of understanding of American business and his disdain for people who work hard to create their own enterprises.
             Obama and the Democrats have been trying to walk these words back ever since, complaining that they have been taken out of context, and that he was really talking about the investments made by the government that benefit everybody. So you can decide on your own, I quote the whole two paragraphs:


“There are a lot of wealthy, successful Americans who agree with me -- because they want to give something back.  They know they didn’t -- look, if you’ve been successful, you didn’t get there on your own.  You didn’t get there on your own.  I’m always struck by people who think, well, it must be because I was just so smart.  There are a lot of smart people out there.  It must be because I worked harder than everybody else.  Let me tell you something -- there are a whole bunch of hardworking people out there.” 
    “ If you were successful, somebody along the line gave you some help.  There was a great teacher somewhere in your life.  Somebody helped to create this unbelievable American system that we have that allowed you to thrive.  Somebody invested in roads and bridges.  If you’ve got a business -- you didn’t build that.  Somebody else made that happen.  The Internet didn’t get invented on its own.  Government research created the Internet so that all the companies could make money off the Internet.”
But Obama's explanations fail to explain why some people become entrepreneurs and others are not successful. Rather, he has engaged in the "Post Hoc, Ergo Propter Hoc” fallacy. Because someone becomes a successful entrepreneur after the government has built the roads or the Internet, it does not follow he became successful because of those roads. The roads or the Internet did not make entrepreneurs successful – they succeeded because their own individual initiative.
 The roads or the Internet are a common good, available to everybody. If they are what is necessary for someone to become an entrepreneur, then anybody could become successful.  Obviously, it is some other reason than the availability of government resources, or even the benefit of a great teacher, that enabled individuals to create success. Most Americans recognize that their success depends on their own individual ability and initiative; President Obama's language establishes that he does not believe this.
Charles Krauthammer, in his column this week, also recognizes that Obama's argument is fallacious, although he points to a different fallacy. He states "to say all individuals are embedded in and the product of society is banal. Obama rises above banality by means of fallacy: equating society with government, the collectivity with the state. Of course we are shaped by our milieu. But the most formative, most important  influence on the individual is not government. It is civil society, those elements of the collectivity that lie outside government:… The voluntary associations that Tocqueville understood to be genius of America have the source of its energy and freedom."

 By the way, Obama's claim that government research created the Internet generated rebuttal in an interesting Wall Street Journal column.

May 29, 2012

Republicans Start to Attack Obama Public Equity Record

I am glad to see that the Republicans have started to attack Pres. Obama's record on public equity investments – tit-for-tat for Democratic attacks on private equity. Karl Rove's American Crossroads group has published an excellent commercial, to which I was going to link. However, the Powerline Blog beat me to it, and also included an advertisement from the Romney campaign on the same subject. Therefore I will link to Powerline.

May 25, 2012

How Does Obama's Public Equity Record Compare to Romney's Venture Capital Record?

Yesterday, two major newspapers published columns looking at President Obama's public equity record in light of his attacks on Gov. Romney's record at Bain Capital. In the Wall Street Journal, Kimberly Strassel published "Vulture capitalism? Try Obama's Version". In the Washington Post, a column by Marc A. Theissen was entitled "Forget Bain – Obama's Public - Equity record is the Real Scandal."


Ms. Strassel suggests "Like Mr. Romney, Mr. Obama has presided over bankruptcies, layoffs, lost pensions, run-ups in debt. Yet unlike Mr. Romney, Mr. Obama's C-suite required billions in taxpayer dollars and subsidies, as well as mandates, regulations, union payoffs and moral hazard. Don't like "vulture" capitalism? Check out the form the president's had on offer these past three years: "crony" capitalism."  Ms. Strassel focuses on Solyndra and General Motors, particularly the $82 billion put into the car industry, which seemed primarily designed to protect union pensions.


Mr. Theissen's Article provides a more comprehensive list of the Obama administration's public equity failures – including at least eight major investments in green energy that have become failures. In fact, his column will make a good reference tool for future discussions of Obama's failures. He concludes: "Now the man who made Solyndra a household name says Mitt Romney’s record at Bain Capital “is what this campaign is going to be about.” Good luck with that, Mr. President. If Obama wants to attack Romney’s alleged private equity failures as chief executive of Bain, he’d better be ready to defend his own massive public equity failures as chief executive of the United States."


The irony is that while Obama has been throwing money at uneconomic green energy projects, the entire economics of energy in the United States have been transformed. The development of the Barnett Shale and other major shale developments elsewhere in the country has enormously increased the availability of natural gas, and dropped its price from $12 to $2. Competition between oil and gas is more intense than ever. It is clear that the free market has produced a result far superior to President Obama's attempts to force feed new types of energy sources to us at substantial government expense. 



May 22, 2012

Republicans Need to Focus on Size of Deficit

I have been concerned over the past several months that the Republicans are not adequately explaining the problem of the federal deficit. It is not just that the deficit exists, but that it is so enormous. While the deficit itself may not be the sole or most important issue (that is obviously the economy), it is of vital importance that Republicans clearly explain how large it is, compared to the federal budget, and what it will take to get it under control.

The Congressional Budget Office does an excellent job of issuing monthly reports on the federal budget, showing changes in revenue and expenses, and providing detailed information on the deficit. This month, it also issued a separate report showing that the federal deficit for the first seven months amounted to $721 billion.  The latest monthly report shows that, during the first seven months of the fiscal year, the deficit amounted to 34.25% of all federal expenditures. Thus, more than one third of all federal outlays were paid for with borrowed money.  During that time period, the US spent 52.1% more than it took in.

No country can continue indefinitely with these gaps.  Under current federal policies, the deficit will only increase and become an even greater proportion of gross national product.

When talking about this, I often ask people for their estimate of the size of the deficit, compared to federal expenditures. The general estimate is that it is about 20%, and they are shocked when I tell him that it is over one-third of all federal outlays. It seems to me that discussion of the deficit has a much greater impact when people understand how enormous it is, compared to federal expenditures. I believe the Republican should pound this home every time that they discuss the issue.

The Pan Am Bomber – a Side Effect of his Treatment

The recent death of Abdel Baset al Megrahi, the convicted Lockerbie bomber, three years after his release from prison in Scotland has drawn an interesting Wall Street Journal editorial explaining why he lived so long after the initial prognosis that he only had three months to live.

According to the Journal, the doctor who made the initial estimate explained that his estimate was based upon the National Health Service medical treatment in Scotland, where certain standard chemotherapy treatments were not available because of their cost. In contrast, Mr. Megrahi undoubtedly obtained excellent treatment in Libya, where he could receive better chemotherapy.

The Journal draws the obvious conclusion that, unconstrained by government conclusions on cost-effectiveness, Mr. Megrahi lived almost 3 years longer than he would have in the Scottish, highly regulated, medical environment. The potential for similar results to occur in the United States under Obama care is obvious.

January 10, 2012

Romney "Gaffe" Should Strengthen Support for Him

In talking about health insurance yesterday, Governor Mitt Romney commented that "I like being able to fire people who provide services to me."  Of course, this was was immediately proclaimed a gaffe by the political reporters and jumped on by his opponents

However, those who realize that there will have to be substantial cuts in government expenditures in order to control the deficit should welcome such an attitude.  We can only hope that, when elected President, he will be enthusiastic in chopping government programs, even it it means firing people.  We need a hard-hearted budget hawk who will not be dissuaded from making the necessary cuts, and who will not be swayed by the certain howls of outrage from those whose jobs will be lost.  We can only hope that Romney truly means it.

Companies Fined for not Using a Biofuel that Doesn't Exist

Here is a true regulatory gotcha.  The 2007 Energy Independence and Security Act required, inter alia, the use of diesel fuel made from biomass, setting a goal of 250 million gallons in 2011 and 500 million gallons in 2012.  However, such cullulosic fuel does not exist.  It has  never been made commercially.  Nevertheless, the EPA will fine refiners for failing to include this product in their gasoline.  The New York Times has covered this folly in detail in today's paper.

Good Video on Deficit

I have previously blogged about the enormity of the deficit and the national debt, noting that the deficit in fiscal 2011 was 36% of total federal expenditures and that the government spent 57% more than it took in.  Now comes a short video that transposes these figures to the context of a single family.  You will like it.